The EU as Last-Ditch Escape Artist

Europe's progress towards greater unity over the past half century has always been a messy business, marked by recurrent warnings of collapse followed by compromises that fully satisfy nobody but keep the show on the road. So why is the 40-month old eurozone crisis any different? With the embarrassing case of Cyprus handled, won't this all end with yet another patched-together solution?

The answer is probably, no, and the ramifications of what is happening reach far beyond the kind of late-night settlements which European leaders have been so adept at cobbling together in the past. The crisis that started with Greece's 2009 disclosure of a black hole in its budget is broader in scope and more interconnected from what went on before. The eurocrisis involves fundamental issues which European leaders skirted as the Common Market trading block of the 1950s evolved into today's highly complex machine based on Brussels with a common currency that remains a work in progress.

Cyprus was dealt with, for the moment at least, by the kind of draconian measures which powerful members can impose on a small, weak member of their club. Without the last-minute settlement reached in the early hours of 25 March, the island would have been bust, abandoned not only by its European partners but also by the Russians who had taken advantage of the lax banking regulations to put their money in its banks. So the country must now pay the price with austerity, the closing of one big bank and the restructuring of another plus levies on bank savings that will destroy dreams of a would-be thriving off-shore financial center and leave those with the largest deposits much worse off.

So far, governments have taken the hit for bailing out countries in trouble, starting with Greece. But the penalty applied in the case of Cyprus at the behest of Brussels and Europe's prime economic power, Germany, has opened a new avenue of pain as private investors found themselves contributing, whether they wished to or not, as part of the rescue package while the imposition of capital controls made nonsense of free circulation of cash within the currency zone.

Jeroen Dijsselbloem, the Dutch head of the Eurogroup, a formal intergovernment organization of the zone's finance ministers, then upped the stakes by saying that this would set a model for the future. Shareholders in insolvent banks in countries needing rescue would be hit first followed by bondholders and uninsured depositors. Though Dijsselbloem swiftly withdrew that statement, the future seems plain as other smaller eurozone members come under scrutiny and investors face the prospect of finding their capital expropriated as the result of decisions by politicians desperate to prevent the common currency from unraveling. Riding the tide of cheap money flowing from quantitative easing, markets have taken this calmly, but, if similar medicine was applied to a bigger country, the rush for the door could turn into a stampede.

The make-it-up-as-you-go-along style applied through the crisis, and most evident in the shambolic handling of Cyprus, is all the more dangerous because of the context surrounding the common currency.